When the chairman of the Auto Parts Association warned of nearly 1 million layoffs, it straight away triggered a panic reaction in the markets. The auto parts industry employs 5 million people and this would mean that 20% of the work force would be out of jobs. This is a pointer towards a much larger problem and that is the slowdown in the Indian auto sector. Why the auto sector is slowing and what are the options in front of the government?
Confluence of factors
In fact, there are multiple factors at play leading to this slowdown in the auto sector. Firstly, dealer inventory pile up has been a problem for quite some time. It has now reached tipping point and dealers are neither able to nor willing to carry inventory any longer. Secondly, there is a clear consumption slowdown in India. The CSFB report on consumption had clearly pointed out that weak liquidity conditions in the market had led to a sharp fall in demand for automobiles and other consumer durables. According to the report, Indian consumers were actually putting off consumption by as long as one year to tide over the liquidity crisis. The volatile prices of petrol and diesel have only added to the problems. Lastly, there is the NBFC angle to it. Tight liquidity conditions and higher cost of funds has crunched the funds available for auto lending. Even where the liquidity is available, the cost is too high!
What can government do?
The Budget has spoken about incentives for EVs but that is still a long time away. The immediate challenge for the auto sector is to be able to survive till the demand picks up. The Budget did little to put more money in the hands of the people. It is time to think about a series of sops (both tax and otherwise) to give a boost to spending and demand for durables. Unless that demand revival happens, the auto companies are likely to be under pressure. Secondly, the government has just announced gradual phase out of 15 year old cars but that could only have a marginal impact. The big focus of the government should be to ensure that the wheels of credit for the auto industry at affordable rates start moving again. Unless that is done, any auto recovery could be elusive.
Why automobiles matter?
Autos are the best proxies for life style upgrades and consumer spending. It also creates a pool of loans for banks and NBFCs that are relatively low risk. In most countries, especially in the developed markets of the US, Japan and Europe, the auto industry is seen as a lead indicator of a turnaround in growth and consumption. If Finance Ministry is really serious about getting GDP growth back to 7.5%, then it needs to address the auto industry woes. Auto parts are just the tip of the iceberg. The sooner this is addressed, the better! ©